This article is the third installment of “American Competitiveness
job creators with lower tax rates, simpler tax administration,
– A National Assessment through the Eyes of Job Creators” – a
navigable regulatory systems, and more modest operational costs
ten-part series that explores how well America is positioned to
excel in today’s tightly-contested global economy. Our analysis of the nation’s economic readiness centers on the eight questions
Taxing U.S. Competitiveness
that job creators ask when determining where to locate, invest,
When comparing the cost structures of competing locales, job
grow, and hire in a world of expanding alternatives. In the
creators look especially at tax costs.2 In this influential category,
previous article we analyzed the requirement for enterprises to
the United States does not stack up well. We now possess the
access ample customers and vibrant markets. Today we address
highest corporate income tax rates in the Organisation for
another important question on which job creators’ base
Economic Cooperation and Development (OECD). From 2000 to
decisions: Will the costs of doing business be reasonable and
2010, average national corporate tax rates worldwide dropped
from 32.8 percent to 25.7 percent. The United States, however,
Enterprises either sink or swim based on their costs of doing business. Not surprisingly, they gravitate to where outlays for taxes, regulatory compliance, and operational expenses are most reasonable and contribute to a strong, stable business environment. By all measures the United States is a comparatively high-cost location for business. To some degree these costs reflect our highly developed society and exceptional quality of life. The competitive drag they inflict is mitigated by the many advantages created by the size and the wealth of our market, the rule of law, and the safety of capital. Still, in a price-sensitive global economy high costs are not part of a winning formula, particularly when other countries with high-growth markets are appealing to
has remained unchanged at 40 percent, when federal, state, and local taxes are taken into account.3 The World Bank, McKinsey Global Institute (MGI), World Economic Forum (WEF), and PricewaterhouseCoopers (PwC) each have reported on the chilling effect America’s tax system has on the U.S. business environment.4 As the National Small Business Association notes, “The corporate tax rate is just one small piece of the equation—the overwhelming majority of small businesses are pass-through entities and therefore pay business taxes through their individual income tax. America’s small businesses need broad, comprehensive and fair tax reform.” That’s why, according to the NSBA, “Small business consistently ranks reducing the tax burden among their top issues.”5 17
Moreover, America remains one of only five major economies that continue to tax the overseas earnings of domestic earnings when the proceeds are brought back home.6 According to Cisco Systems CEO John Chambers and Oracle Software President Safra Cayz, “This means that U.S. companies can, without significant consequence, use their foreign earnings to invest in any country in the world—except here.”7 And, to a large extent that is exactly what is happening.
Ruling Out Common Sense Besides our costly and complex tax code, job creators consistently view the severe inefficiencies of the U.S. regulatory system as a major competitive impediment. Like taxes, regulations are a vital part of providing for a well-functioning society; but when they are unnecessary, unduly burdensome, result in administrative delay, and costly paperwork they represent an enormous drag on economic growth and
Added to high taxes, the complexity of the internal revenue code
competitiveness. The European Commission summed up the
and the enormous cost of tax compliance significantly damages
formula succinctly in its campaign to reduce the excessive
the appeal of our business environment. The U.S. tax code is
regulatory and administrative costs burdening the European
among the most complicated in the world—a 71,500-page
Union: “Less Paperwork = More Jobs.”10
behemoth, twice as large now as it was in 1984, and growing by nearly 3.28 percent per year.8 National Small Business Association notes, “Although the actual out-of-pocket cost is a huge issue, the sheer complexity of the tax code has been an ever-increasing thorn in the sides of small-businesses.”9 The cost of compliance exceeds a staggering $168 billion per year (approximately 15 percent of annual income tax receipts). These outlays, of course, are passed through to consumers here and abroad, and every dollar that business must spend navigating an outsized tax code is one less dollar available for payroll, R&D, and other productive investments.
The World Economic Forum finds that 57 countries have less onerous regulatory systems than the United States. The OECD has found U.S. regulations to be among the most complex and costly of those in the developed economies, in many cases failing to produce the public benefits intended.11 MGI warns that precisely because of undue regulatory burden “the relative competitiveness of the U.S. business and regulatory environment is declining—at a time when many international jurisdictions are aggressively adjusting their regulatory environment and streamlining processes for working with business to attract new investment.”12 The U.S. Small Business Administration reported that by 2008 the cost of regulations had reached more than $1.75 trillion per year, 18
or the equivalent of over $10,500 per employee for small business
significantly reduce the complexity of regulations and streamline
—36 percent more than for large companies.13 Each year the
the process of resolving disputes.”17
federal government issues some 4,000 new regulations.14 The accretion of these rules issued by a multitude of federal agencies
(sometimes pursuing conflicting missions), combined with the
The third expense-related pillar of national competitiveness is the
rules imposed by multiple layers of state and local jurisdictions,
cost of operation, particularly universal costs for workforce,
creates a complicated regulatory patchwork of administrative
energy, health care, and liability.
burden inhospitable to enterprise.15 The United States is relatively a high wage country, owing in large Despite the competitive damage the United States has no
part to the high productivity and the advanced development of
process for routinely reviewing regulations to determine which
the American economy. According to the Bureau of Labor
can be improved and which others should be eliminated. As the
Statistics (BLS), the United States ranks 14th in “hourly
Brookings Institution observes in a Hamilton Project report,
compensation costs in manufacturing.” Of the 34 countries
"[Regulations]... are rarely (if ever) evaluated or fine-tuned after
evaluated by the BLS, the U.S. average wage exceeds that in 20
they are issued ... A more effective regulatory system would
nations—including the United Kingdom, Japan, Israel, Singapore,
continually evaluate regulation's impact and identify areas where
and Korea—but falls below that in 11 western European countries
reform would be beneficial."16 This includes not only the
regulations themselves but the procedures for administering them.
Our status as a relatively high wage country does not mean that the United States must accept a competitive backseat to
In a fast-moving global economy, bureaucratic inertia and time-
countries with lower-priced labor, including in the manufacturing
wasting procedural delays, particularly in permitting, are daggers
sector. American workers are far more productive than those in
in the heart of enterprise. As a recent OECD report stated, “Red
the emerging BRIC nations (Brazil, Russia, India, and China), even
tape is costly, not just in time and money spent filling out forms
though the productivity in these countries is on the rise.
but also in terms of reduced productivity and innovation in business.” To make a start on remedying this competitive
America’s strength lies in making for the world the complex, high-
shortcoming, says McKinsey, “the United States could
value products that require the skills of a highly capable workforce—capabilities not readily found offshore. The Germans 19
provide a compelling model. Despite paying even higher average
A Kaiser Family Foundation report, noted that “U.S. health care
wages than the United States, Germany competes strongly by
spending per person rose 60 percent to $7,538 between 2000
cultivating a skilled workforce that stakes its advantage on
and 2008” (compared to the OECD average of $3,944), soaking
specializing in the manufacture of precision products.
up 16 percent of U.S. GDP and growing.21 In a 2010 survey of
Despite advantageous trends in the upward movement of labor costs overseas, additional costs imposed by government on hiring and employment can significantly constrain America’s ability to increase employment. A study prepared by the International Monetary Fund on factors influencing job creation in Europe found that “Extensive employment protection appears to
more than 500 U.S. chief financial officers and senior comptrollers about their cost concerns, the number one by far was the rising expense of employee benefits, including health care and pensions.22 The Business Roundtable put the cost disparity in stark competitive terms: “For every dollar we spend in the United States on health care, the G-5 countries spend just 47 cents.”23
dampen job creation, as does a higher level of overall taxation.
Like health care expenses, energy costs are a widely shared
The finding that high dismissal costs are associated with weak
business expense that greatly influences our economic
job creation appears consistent with the idea that they also lead
prospects. The importance of an affordable, reliable, and
employers to substitute capital for labor.”19
sustainable energy supply is hard to overstate for the economy at
An Unhealthy Situation
large, but particularly for key energy-intensive sectors such as manufacturing and agriculture. A 2006 report on energy prices
The most significant cost factor bearing on the American
prepared by the Department of Commerce, prior to the recent
workforce and our national competitiveness is health care—an
drop in natural gas costs, stated, “Many manufacturers in energy
expense that is far higher here and continuing to rise at a much
intensive industries say that rising energy costs are their biggest
faster pace than abroad. Over the past four decades, U.S.
challenge. They base many decisions, including those about
spending on health care has grown 4.9 percent annually, nearly
shutting down U.S. production and investing in other countries,
double the pace of yearly per capita GDP growth (2.1 percent).
on the cost of energy in the United States.”24
The implications of this imbalance for business competitiveness are fearsome, particularly as McKinsey points out, “the burden of insurance cost is borne by businesses” both large and small.20
Powerful Considerations America’s energy picture compared to our competitors in both the transport and utility sector is a mixed bag and enormous 20
challenges loom. Today, we enjoy lower-cost energy than most in
consumer dollars that could be spent more productively
both the transportation and the utility sector. Thanks in large part
elsewhere in the economy.27
to a renaissance in the natural gas industry, U.S. natural gas prices have declined nearly 70 percent from their highs only a few years ago, a decrease that promises to reinvigorate a broad swath of important energy production and energy-dependent sectors of our economy.
While the United States is inefficient in energy use, we have been equally inefficient in developing our domestic energy supplies and maximizing their potential for job creation. Inefficiency, whether in the use or development of energy, strains supply, increases the price of our domestic and trade goods, and diverts consumer and
Natural gas provides a case study in the significant interplay of
business spending from more productive uses, as well as adding
energy innovation, supply, and price, and their far-reaching
to costly environmental problems.
influence on U.S. economic competitiveness and job creation. Not long ago America had among the highest natural gas prices
in the world driving companies off shore for cheaper supplies.25
The U.S. tort system is a major competitive liability. In 2009
But recent innovations—in particular the dramatic improvements
America’s over-the-top tort system cost the nation more than
in hydraulic fracturing technology (fracking)—have enabled
$248 billion per year ($808 for every person in the country). As a
energy developers to access massive, previously unrecoverable
percentage of national GDP, we spend more on tort costs than
natural gas. As the natural gas industry has revived (and demand
any other country. A survey of 200 major companies found that
has tempered owing to the recession), gas supply has soared and
“The average outside litigation cost per respondent was nearly
domestic prices have declined significantly, creating a new draw
$115 million in 2008, up 79% from $66 million in 2000.”28
for energy-dependent companies to return to or establish
Sensible tort reform—such as rational non-compensatory award
themselves in the United States.26
limits, rules to end frivolous actions, alternative dispute resolution,
A far less positive aspect of the power picture is America’s continued energy inefficiency. The United States is among the least energy efficient nations on earth—a weakness that places unnecessary expense on the backs of enterprises, while diverting
and other logical steps to bring us more closely in line with international norms—has been an oft-repeated call for many years. Yet, for the most part, the issue remains a political football and one more unchecked agenda item on the “to do” list of American competitiveness. 21
Uncertainty: A Costly Concern For many enterprises, a major worry is not present circumstances but what might be coming next. Executives polled in an MGI survey “nearly unanimously expressed concern about policy, legislative and regulatory uncertainty” that will add to their costs and impede competitiveness.29 Rational investment and business planning require a picture as clear as possible about the government’s expectations of private enterprise, the rules of the road, and the cost of doing business. When tax rules, operating regulations, and other key policies are up in the air or constantly subject to change, job creators are far more reluctant to take risks and commit the resources necessary to spur our economy and put people to work—and far more likely to turn elsewhere. The Bottom Line If America is to sustain prosperity in an opportune global economy the cost of doing business here must stack up strongly against other countries in attracting investment, enterprise, and job creation, particularly because we must sell into overseas markets that are growing exponentially but where the price
innovation, and competitiveness, including the adoption of a single corporate tax rate commensurate with rates of our chief competitors in the European Union and Asia, between 23 percent and 29 percent, the implementation of a territorial tax system, and overall policies that promote investment, business expansion, employment, and economic growth.30 • That means reasonable regulatory compliance costs and procedures. We must streamline the code of federal regulations to ensure that rules are smarter, simpler, and less onerous, including benchmarking the U.S. regulatory system and major regulations against those of key competitors. We would do well to publicly report the findings of international comparisons and recommend reforms to promote cost-efficiency, identify international best practices, and improve U.S. competitiveness while meeting important regulatory goals. • That means managing our operational expenses—particularly for health care, energy, and liability. We must ensure these cost leaders are affordable and stable, and don’t put enterprises that locate in the United States at competitive disadvantage. Achieving this goal will require stiffer levels of domestic competition, public sector restraint in adding costs, and
competition is stiff.
sensible policy that keeps the impact of governmental action on
• That means a tax rates (federal, state, and local) that no longer
laws, regulations, and policies.
U.S. cost competitiveness firmly in mind when passing new
top the field. We must clean up the tax code to create a U.S. business climate that fosters economic growth, job creation, 22
Success on these fronts will lead to a stronger economy, higher employment, greater productivity, and a healthier treasury to meet the nationâ€™s needs. Failure will result in business flight, fewer jobs, a smaller tax base, and a weaker country.
1. Council on Competitiveness. Ignite 1.0: Voice of American CEOs on Manufacturing Competitiveness. Washington, DC: Council on Competitiveness, 2011. 2. PriceWaterhouseCoopers. U.S. Insourcing Investment Climate: A CFO-Level Survey of U.S. Subsidiaries of Foreign Companies. Washington, DC: Organization for International Investment, 2011. 14. Web. 2 Apr. 2012. <http://www.ofii.org/docs/OFII_CFO_Survey_2011.pdf>. CFOs view a knowledge/ skilled workforce as being the most important factor in deciding on locations in which to invest, followed closely by the corporate tax system and trade policies. 3. Hodge, Scott A. "Countdown to #1: 2011 Marks 20th Year That U.S. Corporate Tax Rate Is Higher than OECD Average." The Tax Foundation Fiscal Fact No. 261 8 Mar. (2011). Web. 2 Apr. 2012. <http:// www.taxfoundation.org/files/ff261.pdf>. Also see Marckle, Kevin S., and Douglas Shackelford. "Do Multinationals or Domestic Firms Face Higher Effective Tax Rates?"National Bureau of Economic Research Working Paper 15091 (2009) 4. Doing Business 2011: United States Country Profile. Washington, DC: The World Bank Group, 2010, 2. <http://www.doingbusiness.org/~/media/FPDKM/Doing%20Business/Documents/Profiles/Country/ DB11/USA.pdf> 5. National Small Business Association, 2010 Mid-Year Economic Report, (Washington, DC: July 10, 2010), 11. 6. Barbara Angus and Tom Neubig, “Japan’s Move to Territorial Taxation Contrasts with U.S. International Taxation Contrasts with U.S. International Tax Policy.” International Tax Alert, (Ernst Young, April 10, 2009). http://tax.uk.ey.com/NR/rdonlyres/ edb7ggulansyuajnmmscid3lcobk6ap35suar4geem22gu5bvacg3r52522yugcoujqtmppkniq4qf4zw5sz4zu uayd/ITA077.pdf. China, South Korea, Mexico, Russia are the only other major economies employing a worldwide taxation scheme. Additionally, the U.S. statutory rate is at least 10% higher than in each of these countries. “Japan’s recent replacement of a worldwide taxation system with a territorial tax system leaves the United States as the one country headquartering large multinational corporations that still has a worldwide taxation system and a tax rate above 30%.” 7. John Chambers and Safra Catz, “The Overseas Profits Elephant in the Room: There’s a Trillion Dollars Waiting to be Repatriated if Tax Policy is Right.” The Wall Street Journal, October 20, 2010. http:// online.wsj.com/article/SB10001424052748704469004575533880328930598.html? mod=djemEditorialPage_h
8. CCH Standard Federal Tax Reporter, “Federal Tax Law Keeps Piling Up” (Wolters
usually little-to-no requirement that regulations be evaluated after they are implemented,
Kluwer, Release 28, 2011) http://www.cch.com/wbot2011/
to test if they are working effectively.”
WBOT_TaxLawPileUp_(28)_f.pdf 17. James Manyika, et al., Growth and Renewal in the United States: Retooling America’s 9. Todd McCracken & Larry Nannis, 2011 Small Business Taxation Survey (National Small
Economic Engine, 55.
Business Association, 1). http://www.nsba.biz/docs/2011/nsba-tax-survey(V2).pdf 18. Bureau of Labor Statistics, Hourly Compensation Costs, U.S. Dollars and U.S. = 100 10. Directorate-General Enterprise and Industry, Less Paperwork=More Jobs: Action
(database), U.S. Department of Commerce, March 8, 2011, http://www.bls.gov/
Programme for Reducing Administrative Burdens in the European Union, (Brussels:
European Commission, May 2008). <http://ec.europa.eu/enterprise/policies/betterregulation/files/mb_20052_event-brochure_v6_en.pdf>
19. Garibaldi, Pietro, and Paolo Mauro. 2000. “Job creation: why some countries do better. Washington DC: International Monetary Fund.” http://www.imf.org/external/pubs/
11. Klaus Schwab, et al., The Global Competitiveness Report 2011-2012 (Geneva: World
Economic Forum, 2010), 362-363.; Scott Jacobs & Rex Deighton-Smith, Regulatory Reform in the United States: Government Capacity to Assure High Quality Regulation,
20. Manyika, James, David Hunt, Scott Nyquist, Jaana Remes, Vikram Malhotra, Lenny
(Organization for Economic Cooperation and Development, 1999), 5. http://
Medonca, Byron Auguste, and Samantha Test. "Growth and Renewal in the United
States: Retooling America's Economic Engine." Journal of Applied Corporate Finance 23, no. 1 (2011): 9-19. Along with health care costs, job creators are concerned about the
12. James Manyika, et al., Growth and Renewal in the United States: Retooling America’s
employment costs associated with absenteeism. According to the 2010 Global
Economic Engine, (McKinsey Global Institute) 13.
Manufacturing Competitiveness Index report, “Companies are finding that losses due to absenteeism and unfit workforce also create a drag on the competitiveness of the
13. Mark Crain and Nicole V. Crain, The Impact of Regulatory Costs on Small Firms,
manufacturing sector and the overall economy in reduced productivity and quality.” See
(Washington, DC; U.S. Small Business Administration, September 2010), IV. http://
2010 Global Manufacturing Competitiveness Index, 11.
archive.sba.gov/advo/research/rs371tot.pdf 21. Henry Kaiser Family Foundation, Health Care Spending in the United States and 14. Julie Borowski, “REINS Act: No Major Regulations without Congressional
Selected OECD Countries, Menlo Park, CA, April 2011.
Approval,” (Washington, DC; Freedom works, September 23, 2010). http:// www.freedomworks.org/blog/jborowski/reins-act-no-major-regulations-without-
22. Katherine Hobson, “Employee-Benefit Costs Concern CFOs Most,” The Wall Street
Journal, Health Blog. (November 1, 2010). http://blogs.wsj.com/health/2010/11/01/ employee-benefit-costs-concern-cfos-most/.
15. “Over-regulated America.” The Economist, February 18, 2012. http:// www.economist.com/node/21547789.
23. Joe Crea, “Business Roundtable Study Shows U.S. Slowing Gaining Ground in Health System Value,” Business Roundtable, November 30, 2010, http://businessroundtable.org/
16. Greenstone, Michael. "Revamping Regulatory Review." Politico, January 19, 2011.
http://www.politico.com/news/stories/0111/47792.html. “Most potential regulations are evaluated before implementation — when we know the least about how they will work.
24. Rachel Halpern, Sarah Lopp, Samuel Beatty, et. al., “Energy Policy and U.S. Industry
New rules go on the books and can stay there, unexamined, for years, even decades.
Competitiveness,” Washington, D.C.: U.S. Department of Commerce, 1, http://
There is no system for collecting information about regulations once they are in place, and
25. Ibid. â€œIn the fall of 2005, a particularly difficult year, natural gas in the U.S. cost almost an average of almost $9 per million Btu. At the same time, gas in Europe was under $7, Asia under $6, and Trinidad, Russia, and the Middle East under $2.â€? 26. Mouawad, Jad, and Nick Bun. "U.S. Economy is Better Prepared for Rising Gas Costs." The New York Times, March 9, 2011. http://www.nytimes.com/2011/03/09/ business/economy/09gasoline.html?_r=1. 27. Manyika, James, David Hunt, Scott Nyquist, Jaana Remes, Vikram Malhotra, Lenny Medonca, Byron Auguste, and Samantha Test. "Growth and Renewal in the United States: Retooling America's Economic Engine." Journal of Applied Corporate Finance 23, no. 1 (2011): 13. 28. Lawyers for Civil Justice, Civil Justice Reform Group, and U.S. Chamber of Commerce Institute for Legal Reform, Litigation Costs Survey of Major Corporation, 2010 Conference on Civil Litigation, Duke Law School, May 10, 2010. 29. Council on Competitiveness, Ignite 1.0, 10. 30. Ross DeVol and Perry Wong, Jobs for America: Investments and Policies for Economic Growth and Competitiveness. The Milken Institute (January 2010), 2. http:// www.milkeninstitute.org/pdf/JFAFullReport.pdf. Jobs for America concluded that reducing US corporate income tax rates to the current average of OECD countries would stimulate growth in the manufacturing sector and create more than 2 million jobs by 2010.
The Eight Factors of American Competitiveness
ÂŠ 2012 National Chamber Foundation The National Chamber Foundation (NCF), the public policy think tank of the U.S. Chamber of Commerce, drives the policy debate on key topics and provides a forum where leaders advance cutting-edge issues facing the U.S. business community. NCFâ€™s programs focus on three goals: (1) examining emerging business issues, (2) driving public debate, and (3) informing business and government leaders. To achieve these goals, NCF offers research programs, roundtables and conferences, and leadership development initiatives.